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Stocks Climbed Higher Following Key Labor Report

U.S. equities rose sharply to close out the day, as investors digested December’s key nonfarm payroll report and its possible implications on future Fed moves. While job growth remained robust and the unemployment rate fell, indicating a tight job market, wage increases continued to slow. The report came in the wake of other employment data and the Fed's meeting minutes this week that appeared to solidify expectations of the Fed remaining aggressive in its rate hike campaign. Meanwhile, domestic services sector activity tumbled into contraction territory for the first time since May 2020, and factory orders fell more than forecasts. Treasury yields dropped following the data, and the U.S. dollar fell, while crude oil prices nudged higher, and gold gained ground. News on the equity front was in short supply, but Tesla was back in the news after it said it will slash prices in China for a second time, and Bed Bath & Beyond is reportedly near filing for bankruptcy, while Costco reported net sales that were well received. Stocks in Asia were mixed, and European stocks were noticeably higher, as the markets digested regional economic data and the U.S labor report.

The Dow Jones Industrial Average rose 701 points (2.1%) to 33,631, the S&P 500 Index climbed 87 points (2.3%) to 3,895, and the Nasdaq Composite soared 264 points (2.6%) to 10,569. In moderate volume, 3.9 billion shares of NYSE-listed stocks were traded, and 5.1 billion shares changed hands on the Nasdaq. WTI crude oil nudged $0.10 higher to $73.77 per barrel. Elsewhere, the gold spot price went up $30.90 to $1,871.50 per ounce, and the Dollar Index fell 1.1% to 103.91. Markets ended higher for the week, as the S&P 500 and DJIA gained 1.5%, while the Nasdaq Composite advanced 1.0%.

Tesla Inc. (TSLA $113) was in the headlines after the electric vehicle maker said it will slash prices in China on its Model 3 and Model Y vehicles. TSLA previously cut prices in October in a bid to solidify its competitive advantage against rivals, including China-based BYD Auto. According to Reuters, the move reflects a 24% discount from four months ago. Shares were higher.

Bed Bath & Beyond Inc. (BBBY $1) is in focus after the Wall Street Journal reported that the home-goods retailer is preparing for Chapter 11 bankruptcy after-sales during the critical holiday shopping season disappointed, citing people familiar with the matter. BBBY warned Thursday that it was running out of cash and said that there is substantial doubt that it can continue as a going concern. Shares are falling.

Costco Wholesale Corporation (COST $483) reported net sales of $23.80 billion for the retail month of December. This marks a 7% year-over-year (y/y) increase for the multinational retail store corporation, with analysts noting sequential comparable sales acceleration and traffic improvement. Shares of COST increased.

Choppiness in the markets continued as 2023 got underway on uncertainty regarding the ultimate impact of aggressive Fed actions to try to combat inflation after downshifting in December from a string of four-straight 75-basis point (bp) rate hikes to a 50-bp increase. The deceleration remained unusually aggressive, and the Fed signaled that restrictive policy will likely have to remain in place for longer and at a potentially higher "terminal rate" than expected.

Schwab's Chief Investment Strategist Liz Ann Sonders discusses in our latest, Schwab Market Perspective: When Will the Fed Brake?, how inflation trends are moving in a favorable direction, but the change is likely too slow for the Fed to take its foot off the brake anytime soon. You can follow Liz Ann on Twitter: @LizAnnSonders.

Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.December job growth tops forecasts, unemployment rate falls, services sector tumbles

Nonfarm payrolls (chart) rose by 223,000 jobs month-over-month (m/m) in December, compared to the Bloomberg consensus estimate of a 203,000 rise, while November's figure was downwardly adjusted at an increase of 256,000 from the initial 263,000. Excluding government hiring and firing, private sector payrolls advanced by 220,000, versus the forecasted rise of 183,000, after increasing by 202,000 in November, revised downward from the preliminarily reported 221,000 gain. The labor force participation rate increased to 62.3% from November's unrevised 62.1% figure and compared to expectations for a slight uptick to 62.2%.

The unemployment rate fell to 3.5%, compared to expectations to remain at November's 3.7%. The underemployment rate—including total unemployed and those employed part-time for economic reasons, along with people who are marginally attached to the labor force—decreased to 6.5% from the prior month's 6.7% rate. Average hourly earnings were up 0.3% m/m, below projections for a 0.4% rise and compared to November's downwardly adjusted 0.4% rise. Compared to last year, wages were 4.6% higher, below forecasts of a 5.0% increase, and lower than November's downwardly adjusted 4.8% rise. Finally, average weekly hours dipped to 34.3 from November's 34.4 rate where it was expected to remain.

The Institute for Supply Management (ISM) Services Index (chart) for December unexpectedly tumbled into contraction territory (a reading below 50) for the key services sector. The index decreased to 49.6, compared to the Bloomberg consensus estimate of a decline 55.0 from November's 56.5 reading. The headline figure is at the lowest level since May 2020, as business activity and new orders dropped, employment fell into contraction territory, while prices declined to 67.6 from last month's 70.0, a level not seen since January 2021.

The ISM said, while respondents indicated that supplier deliveries improved in December, employment contracted due to a combination of decreased hiring amid economic uncertainty and an inability to backfill open positions.

Factory orders (chart) for November fell 1.8% m/m, nearly double the 1.0% loss forecasted, and versus the prior month's downwardly revised 0.4% rise. Durable goods orders—preliminarily reported two weeks ago—were unadjusted from the previously reported 2.1% m/m decline, where it was expected to remain, and excluding transportation, orders were adjusted lower to a 0.1% decline from the previously-reported 0.2% increase. As well, November's final read on nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—was downwardly adjusted to a 0.1% m/m increase from the 0.2% rise in the preliminary reading.

Treasury yields have trimmed gains seen in 2022 that came amid the aggressive monetary policy tightening by the Fed but Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her article, Fixed Income Outlook: Bonds Are Back, how we see opportunities in 2023 for the bond market to provide attractive yields at lower risk than we've seen for several years. You can follow Kathy on Twitter: @KathyJones.

Treasury rates were lower following the data, as the yield on the 2-year note fell 17 bps to 4.27%, the yield on the 10-year note lost 16 bps to 3.56%, and the 30-year bond rate declined 11 bps at 3.69%.

Europe higher amid inflation data and U.S. employment report

Stocks in Europe ended the day noticeably higher, as investors digested some inflation data in the region and today's labor report out of the U.S. Eurozone inflation cooled in December, posting an increase of 9.2% y/y versus the 9.7% rise expected, and below the 10.0% rate in November. On a m/m basis, prices fell 0.3%, reflecting a slowdown in price increases in Germany, France, Italy, and Spain. A moderation in energy prices was behind the better-than-expected figures, as unusually warm winter weather has eased energy crisis concerns.

Caution remained, however, as the midweek release of the minutes from the Fed's December monetary policy meeting out of the U.S. showed officials expect rates to remain higher for longer, keeping recessionary worries intact. The euro and British pound were higher versus the U.S. dollar, while bond yields in the Eurozone and the U.K. declined. In other economic news, retail sales in the Eurozone and Germany fell in November, while consumer spending in France rose.

Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses his Top Global Risks of 2023, highlighting our top five risks that may define the global markets, considering that a new year almost always brings surprises of one form or another. You can follow Jeff on Twitter: @JeffreyKleintop.

The U.K. FTSE 100 Index increased 0.9%, Germany's DAX Index rose 1.2%, France's CAC-40 Index climbed 1.5%, Spain's IBEX 35 Index gained 1.1%, Italy's FTSE MIB Index advanced 1.4%, and Switzerland's Swiss Market Index traded 0.8% higher.

Asia mixed ahead of U.S. labor data

Stocks in Asia finished mixed with the markets awaiting today's employment data out of the U.S., which could have an impact on Fed monetary policy in the world's largest economy. The minutes from the Fed's December meeting released midweek suggested that rates could remain higher for longer after the Central Bank has embarked on an aggressive tightening campaign, which has been joined by most central banks in the world to try to get high inflation back to comfortable levels. Hong Kong stocks pared early gains that came amid news of further support for the property market. Meanwhile, equities in mainland China added to a recent rally on continued strength in the tech sector in the wake of signs that regulatory crackdowns may be easing in the region, as well as the ongoing optimism of a reopening following lengthy COVID shutdowns.

Weaker demand and the recent surge in COVID cases in China have likely weighed on activity and tempered some of the optimism surrounding China's reopening. In his article, Global Outlook: Recovery and Risk, Schwab's Jeffrey Kleintop notes how markets may continue to see volatility in 2023 as they navigate between global economic growth and inflation fears, with central banks' decreasing rate hikes and China's reopening. Economic data in the region was fairly light, with December services sector activity in Japan downwardly revised from the preliminary report, but remaining in expansion territory and above the prior month's figure, while wages in the island nation increased in November, but well short of expectations and the weakest growth since December 2021.

Japan's Nikkei 225 Index rose 0.6%, with the yen losing ground versus the U.S. dollar. China's Shanghai Composite Index ticked 0.1% higher, but the Hong Kong Hang Seng Index declined 0.3%. Australia's S&P/ASX 200 Index finished 0.6% higher, and South Korea's Kospi Index advanced 1.1%, while India's S&P BSE Sensex 30 Index declined 0.8%.

New year starts off on a positive note

The volatility that was prevalent in 2022 carried over into the new year, while stocks finished higher for the week following today’s rally. The Fed released the minutes from its December monetary policy meeting, noting that it remains steadfast in its campaign to combat inflation, despite a slightly moderated 50-bp increase at the meeting. Meanwhile, the job market was also in focus this week, as better-than-expected reads on jobless claims, job openings, and the ADP Employment Change preceded a December labor report that showed a still-robust jobs market, possibly solidifying the notion of an aggressive Fed. Data on manufacturing and services activity were also released, showing contraction for both measures, keeping recessionary concerns simmering. Meanwhile, the U.S. dollar continued to climb, crude oil prices tumbled, and gold saw choppy action.

Next week's economic calendar will be somewhat light but will offer some key reports, as it will begin to develop the December inflation picture, courtesy of the Consumer Price Index (CPI) and the Import Price Index. The NFIB Small Business Optimism Index is also on tap, as well as a look at wholesale inventories. The first look at the University of Michigan's Consumer Sentiment Index for January will come late in the week, while the weekly reads on MBA Mortgage Applications and initial jobless claims are also slated for release, and consumer credit will round out the docket.

The international economic calendar for next week will hold a number of reports that could shape market action, including: China—new yuan loans, CPI, and PPI. Japan—CPI and trade balance. Australia—retail sales and trade balance. India—trade balance, CPI, and industrial production. Eurozone—unemployment rate, industrial production, and trade balance, along with German industrial production. U.K.—retail sales, Q3 GDP, industrial production, and trade balance.


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